Three Ways To Get The Smart Grid To Work

The “smart grid” is a dream concept that will help every ambitious energy dream of the nation fall into place perfectly. Like any good dream it’s got its work cut out for it, trying to overcome the current realities of regulation and consumer behaviour.

Lynne Kiesling, of Knowledge Problem, tackles the smart grid for Reason Magazine arguing that “absent substantial regulatory reform…we may simply reinforce a century-old model that is all but obsolete.”

The smart grid boils down to improved communication between the household and the utility company, so that both can work towards cutting back on electricty usage. As it stands now, though, there’s not much to be gained by knowing the air conditioner costs twice as much at noon as it does at 9 pm. Here’s how Kiesling says we can fix that:

Introduce dynamic pricing:

The most crucial regulatory reform would be eliminating the single, fixed retail rate for most consumer electricity consumption. In February, Obama pledged to install 40 million smart meters in homes. But it doesn’t matter how smart these meters are if homeowners are going to get charged the same old flat rates. Customers need to know how prices vary over hours, days, and seasons. With that information they can decide how much energy to buy and when. Smart technology makes responding to changes in price as easy as scheduling your DVR to record your favourite TV show.

Rethink the way utilities are regulated:

Since utilities are regulated monopolies, they don’t usually receive strong price signals telling them whether an investment is a good or bad idea. Instead, regulators decide which investments are prudent on consumers’ behalf. Regulators can decide that a utility’s investment in a groundbreaking new facility or technology is imprudent after it’s already been built. Naturally this process makes utility executives (and regulators) conservative; it’s just safer to build what has been previously approved.

…Regulated utilities are also accustomed to having control. As owners of power generation plants and electric distribution wires, they have been managing the power network using top-down hierarchical control for almost a century. Not surprisingly, they want to use the new smart grid capabilities for “direct load control”—shutting down your air conditioner from afar during peak hours, in return for which they would offer you a rebate.

It will be wasteful, but continue funding smart meter deployments and hope for the best:

First, it will induce utilities to make technology investments that might be profitable if not for the perverse incentives created by regulation. Using government spending to achieve this outcome is a way of remedying one policy-induced distortion with another, but in the existing regulatory environment this might be a politically palatable way to overcome the stifling, regulation-induced inertia of both the regulators and the regulated. Second, by reducing the cost of information flow to and from consumers, smart grid subsidies may contribute to the erosion and ultimate disappearance of state-level regulatory barriers to retail competition. Telecommunication deregulation sprang from similarly modest roots.